Investment demand can pick up with supply-side moves

The Union budget should provide more comfort on the longer-term growth prospects of India, which will be the key to the Indian equity market in the medium term.The market’s focus will shift to India’s medium-term growth prospects beyond the strong 9-11% real GDP growth in FY22. India’s GDP growth had slowed down significantly even before the Covid-19 pandemic with 4.5% GDP growth in 1Q-3QFY20, pulled down by a sharp decline in investments. India’s GDP growth pattern had become unsustainable, being driven by private consumption financed by declining household savings rate and government consumption financed by large government budget deficits.The emphasis on supply-side reforms and continued high allocation for economic and social capital development in the FY22 budget makes us hopeful about a pick-up in investment demand over the next few months. The spate of reforms in areas of capital and labour and other announcements in the budget should unleash private domestic and foreign investment.We expect modest returns from the Indian market over the next 12 months as the reward-risk balance looks fair. The Nifty-50 Index trades at 21X FY2022E ‘EPS’ (well above its long-term average) although strong ongoing economic recovery, robust earnings rebound in FY2022 (+27%) and FY2023 (+19%) and likely earnings upgrades and continued low domestic bond yields (although higher from current levels) may support high market valuations; the gap between earnings and bond yields is reasonable.The returns from the Indian market over the next 12 months will depend on the interplay of extent of increase in global and domestic bond yields related to global and domestic economic recovery over the next few months, which will determine market multiples and extent of economic and earnings recovery, which will determine FY2022-23E earnings. The risks to global markets stem from any unexpected increase in bold yields, with bond markets worrying about higher inflation and/or burgeoning global public debt-to-GDP despite central banks’ stated policy of holding interest rates until a full-fledged recovery. We do not see meaningful price-value dislocation in the Indian market currently and, thus, do not recommend any significant overweight and underweight positions across sectors. As of now, we see value in the financials and IT services sectors.

from Economic Times https://ift.tt/2MMoSNG